Outrageous: David Cay Johnston Explains How Big Corporations Withhold Your Taxes and Then Pocket Them

Nobody has done more to expose the infinite ways in which the American economy is rigged to benefit those at the top than Pulitzer Prize-winning journalist David Cay Johnston. His rigorously researched books – Perfectly Legal, Free Lunch and now his latest, The Fine Print, are not recommended for people with egalitarian views and high blood pressure – they're every bit as maddening to contemplate as they are informative.

Last week, AlterNet caught up with Johnston by phone. Below is a lightly edited transcript of our discussion.

Joshua Holland: David, for years you’ve reported how those who can afford the right accountants game this labyrinthian and opaque tax-code of ours. How surreal has it been for you to observe the amount of political conflict we've faced over the past few years over returning the top marginal rates to the same rate they were during the Clinton era -- taking them from 35 percent to 39 percent?

David Cay Johnston: I am actually heartened, Josh. I think that we’re starting to see the end of those Chicago School economic theories. (By the way, I went to the Chicago School 40 years ago, but I did not drink the Kool-Aid.) The reality is people are now, finally -- and I can claim some of the credit for this through my books and my reporting -- people are looking around and saying, "Wait a minute! Starting back in 1980, I was promised that I was going to have a better life. We’d all prosper. Yet all the gains are going to the top."

Let me give you a stunning number I reported the other day. From 1966 – when Lyndon Johnson was president -- to 2011, 45 years later, the bottom 90 percent of Americans’ average income, as reported on tax returns, went up by a stunning $59 -- almost no change at all. If you measure that $59 increase for the vast majority of Americans as one inch, then on the same scale, the incomes of those in the top 10 percent went up by 168 feet. The top one percent, 888 feet. The plutocrats -- the Mitt Romney crowd, the top one percent of the top one percent? Their incomes rose by almost five miles relative to that one inch.

JH: That is remarkable. We are talking about an economy that simply doesn’t work for 90% of working people in this country.

DCJ: My latest book, The Fine Print, looks at this in a different way. The first two books – Perfectly Legal is about taxes, Free Lunch is about all the subsidies we give to rich people. The Fine Print is about all these laws the mainstream media has either not reported on, or reported on in the most superficial and disconnected ways, that are designed to destroy market competition and replace it with monopolies, oligopolies, duopolies -- with rules that allow the biggest companies to raise prices and reduce services.

There are 6 million corporations in America, but 2,600 of them, a tiny number out of 6 million, own 80 percent of the business assets in America.

JH: One of the things that, I think, really will jump out to readers as they dig into The Fine Print is the way that you looked into all these little nickel-and-dime charges that corporations levy on us constantly, often thanks to deregulation. We tend to take them for granted, because when you look at your phone bill – and you talk a lot about telecoms in the book – 35 cents here and a 60-cent charge there, they don’t seem so pressing, but they really add up. What’s going on with that?

DCJ: Let me give you a real killer number here. If you can get a law passed to collect a penny a day from everybody in America -- and I show how one industry did this, the pipeline industry got themselves exempted from the corporate income tax, but they still get to collect it in their monopoly rates – if you can get a penny a day from everybody in America, at the end of the year you’ll have over a billion dollars.

What this is about is very simple. If you can get the rules rewritten in your favor... that means you can raise prices, you can refuse service wherever it’s not profitable. You could refuse services as long as you don’t say, “I don’t want to serve you because you’re a lesbian,” or, “You belong to the wrong religion,” you can refuse service.

You know, Americans had be sold on this notion that we are number one in the world. But by some measures, our healthcare system is behind Cuba. We pay almost the highest prices in the world for our Internet. If you buy a triple-play package from one of the American cable or telephone companies – Internet, cable TV and telephone -- on average, you pay $160 a month with taxes. If you go to France, the same package is $40 to $70. There are some variations, but the range is $40 to $70. By the way, here you get one foreign country to call for free. There you get 70. Here you get American television. There you get worldwide television. Here you get an Internet that’s the equivalent of a two-lane Irish road, where you have to stop and wait every now and then, because the sheep are on the path. There you get an information superhighway.

We are now 29th in the world in the speed of our Internet. We are behind Bulgaria, of all places.

We are falling behind left and right. We have a Congress that just cut money for scientific research. We’ve got people who are idiots. I mean that word very clearly, “idiots,” like Sarah Palin going around saying, “Why are we paying for fruit fly research?” Anybody who understands science knows that massive advancements in human knowledge – knowledge that has saved lives -- has come from studying fruit flies. If you’re an idiot like Sarah Palin, if you’re Donald Trump, if you’re Senator Cruz from Texas, then you don’t get it.

We really have to get a society that’s based on science and knowledge, that has an economic system that’s based on competitive markets with protections for consumers. While the rest of the world’s going to run right by us, we’re falling behind!

JH: David, you detailed very, very well how we are constantly being ripped off. It’s a death of 1,000 cuts. Why is that? The story that we’ve gotten, for years and years and years, is that we have less regulation in order to spur competition. Ultimately, that competition was supposed to benefit consumers. What’s going wrong?

DCJ: I want more competition. Here’s what really goes on, however. We put up barriers to competition, and in fact, Wall Street has institutionalized this concept. Morningstar, they’re a big financial advice firm. They tell people that they should grade companies and decide whether to buy their stock, based on something called a “moat index.” Moat, like around a castle? A moat index asks, “What barriers has the government erected to keep anybody else from competing against that company?” Indeed, as I show in my book, you could get rich if you invest in those companies that have regulatory moats -- where under the name of deregulation, we have insulated them from the rigors of the market.

By the way, there is no such thing as deregulation. There is only new regulation. Everything is regulated. I tell my students -- I teach law and graduate business students one day a week at Syracuse University -- I tell them, “Here’s how thoroughly regulated your life is. This university has a rule regulating how many times you can ask somebody out on a date before it’s harassment. Baseball regulates how many stitches are on the baseball. Everything is regulated.”

Under the Chicago School theories, we get new rules that encourage lying, cheating, stealing and fraud. In fact, one of the leading professors from that school, Dean Daniel Fischel, has written the bestselling textbook on securities law in America. You know what that book tells law students? That there is no need for a fraud statute in the securities markets. By the way, his clients were Enron, Michael Milken and Charles Keating of the Keating Five -- three of the biggest fraudsters of our time. Yet, that’s the number-one selling textbook for law students on securities law. And it says there’s no need in the securities to have a fraud statute. Think about all the trouble we're in because of the frauds that went on in the dot-con era -- not “dot-com,” but dot-con era -- in the late ’90s.

Think about the selling of mortgages, not so much to the consumers, but to investors -- particularly public pension-funds -- by Wall Street, where they lied through their teeth, where they faked documents and faked records. Massive fraud and not a single prosecution of any significant person today. Whereas during the savings and loan crisis [of the 1980s], Bill Black got us 1,000 high-level felony convictions and 3,000 convictions overall.

As a parodist on the Internet pointed out, "Where did that get Bill Black? He’s a professor at an obscure college in the Midwest." Whereas the people who looked the other way, look how well they’re doing.

JH: (Laughs) Yes, they’re all in the White House, at this point.

DCJ: They literally are. Barack Obama has surrounded himself with people from Wall Street. Remember when Glenn Beck was telling everybody Obama's not comfortable around white people? I went and looked at the White House table of organization. (Laughs) I got to tell you, he was surrounded by white people from Wall Street.

JH: A lot of the things that you detail in the book come down to companies that are not profiting only by providing goods and services -- traditional transactions of a capitalist society -- they’re deriving rents. Can you explain what rent-seeking is and how it differs from productive capitalism?

DCJ: First of all, everybody is a rent-seeker. Rent-seeking means you try to get paid more than you deserve, more than you should be paid. We have lots of research on this. For example, I know you’ll be shocked to hear that people who are good-looking and taller tend to be better paid than people who are unattractive and shorter. A shocking thought, but it’s a reality in the world.

In the case of corporations, what they do is they get rules passed that prevent competitors from coming into the markets, so they can charge higher prices. As I said, all you need is a penny a day extra, from every person in America, and you have an extra billion dollars at the end of the year. This problem of rent-seeking is, then, compounded by our campaign finance system. What big business -- and that’s those 2,600 companies which own 80 percent of the business assets in America – what those 2,600 companies have figured out, and their leaders have figured out, because people running these firms are very smart people, is that it is easier to mine Congress and the state legislatures for gold than to go out and earn it in the marketplace. Sometimes all you need is to get one word put in to a regulation.

For the lobbyists, they take a very long-term view of this. They get a little change made this year and they say, “It’s no big thing!” A couple of years later, they get another one, and another one, and another one. After 40 years of doing this, you’ve had a very successful career. You’re very wealthy. You can retire. You’ve also managed to totally screw your fellow Americans.

JH: I want to talk about one of the practices you describe that I find to be... I don’t know, I’d say shocking, but I’m pretty hard to shock these days. You wrote about this in a Reuters column -- how in 16 states, big corporations collect state taxes from their employees and pocket them.

DCJ: It’s now up to 21 states. In 21 states, they’ve passed a law that says that taxes withheld from your paycheck, for the state, can be kept by the company. Now, every employer doesn’t get this windfall -- you have to have to get a deal from the government to do it -- 2,700 big companies, every big company you’ve ever heard of, General Electric, Procter and Gamble, Deutsche Bank, you name it, they’ve got these deals, where they get to keep the taxes. Billions of dollars are diverted this way. You know the best thing for the companies about this?

JH: What’s that?

DCJ: The workers don’t know, because once the taxes are withheld, the state government treats you as having paid your taxes. You paid your taxes. They just then give a credit to let the company keep the taxes. I’ve called journalists. I’ve called union people who negotiate union contracts. And they say, “What are you talking about?” I showed them the work I’ve done. They go, “Oh my God!” They have no idea that this is what’s happening, and the fact that it’s spread from the 16 states when I first wrote about this and it’s now grown to 21 – eventually, all of the 44 states with income taxes are going to allow this, if we don’t put a stop to it.

I really, seriously hope people read The Fine Print. I wrote this so you’d know about these things. If you don’t read it, you’re not going to know.